Supply Side Liquidity Incentives

Supply side liquidity incentives are rewards offered by protocols to attract capital from depositors. These incentives are often in the form of native governance tokens, which are distributed to users who provide liquidity to the protocol.

The goal is to bootstrap the supply of assets needed for lending or trading, ensuring that the protocol can meet user demand. While effective at attracting initial capital, these incentives must be carefully managed to avoid long-term inflation and the attraction of mercenary capital that exits as soon as rewards decrease.

Sustainable protocols transition from high-inflation incentives to more organic revenue-based yields as they mature. Analyzing the effectiveness and sustainability of these incentives is crucial for understanding the long-term growth potential of a protocol.